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Does the Market Always Work for Public Services? Advocating a Balanced Approach

There is much discussion of government administration versus privatization in recent years ranging from the discourses of academic economists to that of TV News commentators. For some, the issue may seem settled with the incantation of “let the market work.” Although receiving less media attention, business school research has much to offer and with nuanced real-world institutional detail to inform the conversation. As an example, consider the case of prison privatization, which poses particular ethical, legal, and empirical challenges. While some research suggests that competitive pressures will lead to efficiency in the operation of private prisons such as Corrections Corporation of America (CCA) and the GEO Group, Inc., other research maintains that competition for prison beds occurs in a constrained market that parallels the contracting problems that have been identified in the defense industry.

In this light, some suggest that the United States is now witnessing the emergence of a “prison corporate complex” that parallels the warnings of Dwight Eisenhower’s famous 1961 speech on the “military industrial complex.” Analogous to Eisenhower’s warning of the military industrial complex in which defense contractors pushed for increased military spending, we now are witnessing a prison corporate complex in which a set of bureaucratic, political and vested economic interests encourage increased expenditures on imprisonment. Private prisons such as Geo and CCA use lobbying, direct campaign contributions, and networking to encourage tough-on-crime legislation to ensure an increased supply of prisoners (particularly for non-violent drug offenders). Inmate populations have increased tenfold, from under 200,000 in 1971 to over 2.3 million in 2008. It would be naïve to think that a continuation of current trends will not touch the lives of any of our own (or friends’) children in our communities in the near future.

How are markets working here? Empirical results concerning the efficiency of private prisons are mixed, with some research studies finding cost savings while others provide evidence against the claim that private prisons reduce costs. In this context, basic questions about productivity, quality, and operational efficiencies in management are entangled with issues of better governance. In the case of prison privatization, private subcontractors also must deploy resources in response to complex conflicting signals about the purposes of their activities in an ambiguous field where goals are negotiated and malleable.

Research on the private management of prisons from the fields of strategic entrepreneurship and management illustrates how a focus on resources and capabilities can shed light on the goals that organizations pursue in the public interest. Refer to file at the end of this article for a forthcoming paper I co-authored with Peter Klein, Anita McGahan, and Christos Pitelis on this issue. Such clarity is essential for reducing public exposure to the destruction of value through excessive service provision (i.e., “public bads”). One emerging area of such research deals with the quality of public outputs. For example, some research studies find that the quality of prisons (as measured by recividism rates) may initially be improved under private governance. However, there are sound economic reasons to anticipate that there will be pressures on private-prison managers for quality shading to reduce costs, which would destroy public value. Long-term investments by privately governed prisons to perform on dimensions such as education, drug reformation, and health care services may be greatly curtailed by expressing balanced public objectives in contracts that cede responsibility to private organizations. When such complex objectives cannot be managed, then privatization may simply be too risky to tolerate. A recent analysis summarizing the findings of extant empirical research comparing privately managed and publicly managed prisons indicates that cost savings for private prisons are minimal and that the quality of these prisons (such as greater skill training and fewer inmate grievances) were slightly better in publicly managed prisons.

When capabilities that are essential to the public interest are controlled by private individuals, agents, or organizations, the essence of the public interest may not be pursued as a consummate goal. By following the rules in a perfunctory way, rather than with intensity and in the spirit of the rules, actors may leverage capabilities to direct organizationsinefficiently, and in ways that may or may not foster the public interest. Activism may be required for alignment of public and private goals.

Taking a public service and placing it more in the “domain of dollars” can have unintended consequences that should give us pause. Consider the recent "kids for cash" scandal, which unfolded in 2008 over judicial kickbacks at the court of common pleas in Wilkes-Barre, Pennsylvania. Two judges accepted over $2.6 million in payments from Mid-Atlantic Youth Services Corp, operator of two private, for-profit juvenile facilities, in return for contracting with the facilities and imposing harsher sentences on approximately 2,000 juveniles brought before their courts to ensure that the detention centers were more fully utilized. Economic analyses concerning private vs. public prisons rarely consider the different opportunities of participants playing outside the rules of the game and their different consequences. Here, informed strategic analyses within our business and public policy schools are needed.

I do not know much for certain, but what I do know is that glib comments like “let the market work” are not good enough. What to do? Dialogue among thoughtful business school researchers and those with practical management experience is needed. First, formulating problems well is exceedingly difficult, and second, solving problems can be as difficult. Reflective practitioners and academic researchers could achieve much together --- and yet we are structurally isolated with few incentives/opportunities for dialogue. Neither group in isolation will likely be sufficient to make substantial headway for such complex societal problems. Maybe this blog can be the start of something great in action. Many thanks, in advance, for any constructive comments you may provide.

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Joseph Mahoney
Caterpillar Chair of Business
Universtiy of Illinois at Urbana-Champaign